Misperceptions of Benefits Make Trimming Them Harder

WASHINGTON — President Obama had Senate Republicans nodding in agreement during a recent ice-breaking dinner as he described a basic problem for the nation’s fiscal future: For each dollar that Americans pay for Medicare, they ultimately draw about $3 in benefits. What’s more, he added, most people do not understand that.

By his point that evening, the president was referring to the widespread and incorrect view, especially among older Americans, that Medicare recipients get only what they have paid for through taxes, premiums and medical co-payments. Now that misperception is making it all the harder for politicians to consider trimming those benefits or raising out-of-pocket expenses as they seek to restrain Medicare spending that is rising unsustainably while baby boomers age and medical prices increase.

There has long been similar confusion about Social Security, although the current generation of new beneficiaries is roughly breaking even.

Late in 2012, for a sixth straight year, Medicare trustees issued a warning required by law whenever more than 45 percent of the health program’s costs must be covered by general revenues from all taxpayers.

To date, Mr. Obama has mostly proposed cuts to payments for health care providers, like hospitals. He has supported reducing benefits or raising costs for higher-income beneficiaries, but has made any broader benefit changes contingent on Republicans’ agreeing to additional tax revenues from wealthy individuals and corporations.

Even so, Republican senators said they were heartened by Mr. Obama’s dinner comments on the growing imbalance between Medicare’s benefits and taxes. If they could not yet agree on solutions, agreeing on the problem was a start, said Senator Ron Johnson of Wisconsin who was among the diners.

“I suggested it would be immensely helpful to reaching solutions to these problems if he would utilize that bully pulpit and start conveying to the American public the full extent, the full depth, of our problems,” Mr. Johnson said.

He added, “I’ll know President Obama is serious about working with us when I start hearing him tell the American people what he told us in private.”

Administration officials said that Mr. Obama, in speaking of a 3-to-1 ratio of Medicare benefits to taxes, was referring just to Medicare’s Part B coverage for doctor and outpatient services.

Older Americans pay about 25 percent of Part B costs through premiums, deductibles and coinsurance (high-income beneficiaries pay 35 percent to 80 percent). The rest comes from general revenues — income taxes and other levies. The ratio is similar for Medicare’s prescription drug benefit: While beneficiaries’ premiums cover about a quarter of costs, the rest comes from general revenues and borrowed money.

“They are heavily subsidized by the federal government, and the trend is getting worse,” said Robert D. Reischauer, a former director of the Congressional Budget Office and now one of two public trustees for Medicare and Social Security.

Medicare payroll taxes finance only the program’s Part A coverage for hospital costs.

While Mr. Obama apparently was speaking only about Part B, analysts say that it is roughly true for all of Medicare that beneficiaries on average pay about $1 for every $3 in benefits.

Analysts frequently cite Gene Steuerle, an economist at the Urban Institute, a policy research organization, who calculates average payroll taxes and benefits for Medicare as well as Social Security over the lifetimes of various types of individuals. Those figures vary by income, health, longevity, marital status, children and other factors.

For example, his October update showed that a single male who earned the average wage ($44,600 in 2012 dollars) and turned 65 in 2010 had paid about $61,000 in Medicare taxes and could expect $180,000 in benefits.

Social Security is a different story these days. That same single male, Mr. Steuerle calculated, paid about $300,000 in payroll taxes, excluding the portion for disability benefits, and could expect a bit less, $277,000, in retirement benefits. (Married couples do better than single people because many of them receive spousal and survivor benefits.)

Social Security and Medicare benefits are greater on average for women because they generally live longer than men.

The idea among Americans that they get back what they paid for, with some rate of return, dates to President Franklin D. Roosevelt’s legislative marketing of Social Security nearly 80 years ago. When Medicare was created in 1965, new payroll taxes were assessed to cover only Part A hospital insurance.

“That was sort of a foundation argument that F.D.R. popularized when the Social Security Act was passed — that this was a fiscally responsible program because people were going to pay in and, as a result of their payments, be entitled to benefits,” said Mr. Reischauer, the public trustee.

Yet Social Security has always been a pay-as-you-go system, with workers’ taxes going not to some actual trust fund for them but directly toward benefits for retirees. Initial beneficiaries paid little or nothing into the system, but “all of the first generations got windfalls,” Mr. Steuerle said.

For decades until the 1980s, workers paid a Social Security tax rate much lower than the current 12.4 percent (split between employers and employees) and on a smaller share of their wages, even as Congress expanded benefits. Only now are new Social Security claimants roughly breaking even and likely to get back about what they paid in. But young workers today can expect fewer benefits for their taxes.

“The bottom line is that the older you are, the more likely that your Social Security benefits exceeded your contributions,” said Charles Blahous, the other public trustee and a former adviser to President George W. Bush. “The younger you are, the more certain it is that your tax burden will exceed what you ever get out.”

As the fiscal debate rages, even the word “entitlement” — long part of the budget lexicon — has come to be seen as a pejorative among Americans who fear that benefits are threatened.

“Social Security and Medicare are both earned and paid for through our salary taxes,” a reader of The New York Times wrote recently. “A better term for these two programs is ‘earned benefits.’ It more accurately describes them without giving them a sense of negativity and welfare.”

Robert Keith, a budget historian formerly at the Congressional Research Service, said the term entitlement first appeared in the 1950s to describe Social Security and veterans and education benefits, and was in common use by the 1970s, after Medicare and Medicaid were created.

It describes programs that automatically provide benefits to those who are “entitled” because they meet certain criteria — like age and payment of payroll taxes — and cannot be changed except by a new law. In contrast, most other federal programs are called “discretionary,” because Congress can add or subtract annually in its appropriations process.

As the past two years have shown, that makes discretionary programs far more vulnerable than entitlement programs when Washington is focused on deficit reduction — though it is the fast-growing entitlement programs and insufficient tax revenues that are driving the projections of mounting debt.

A version of this article appears in print on , on Page A3 of the New York edition with the headline: Misperceptions of Benefits Make Trimming Harder. Order Reprints | Today’s Paper | Subscribe